Still confused about the TFSA? Wonder if you should encourage your employees to contribute to one as well as an RRSP? You are not alone. Perhaps a look at some pros and cons can help give some clarity.


A TFSA is a Tax Free Savings Account to which any Canadian 18 years or older can contribute a maximum of $5,000 per year. 


·          There is no requirement to have earned income to contribute to a Tax-Free Savings Account. This is perfect for spousal plans or for students.

·          There is no tax deduction for contributing to a TFSA; however, the returns generated on investments (interest, dividends or capital gains) are not taxable. 

·          Withdrawals are tax-free. Money can be withdrawn at any time, depending on the investment. In addition, contribution room accumulates each year and any amounts withdrawn can be re-contributed anytime after the year of withdrawal.


The choice of contributing to a RRSP over a TFSA can depend on the tax level at the time of contribution versus the tax level at the time of withdrawal. 


With an RRSP, higher income earners can take advantage of immediate tax deferrals to a future date when their income is expected to be lower and therefore be in a lower tax bracket when making the withdrawals. However, for the reverse, where income is currently low but a much higher income is anticipated at retirement, the TFSA makes more sense as the ability will be there to withdraw tax free at that later date when tax levels will be much higher. 


High income earners who have already maxed out their RRSP contribution room may wish to consider a TFSA as an additional savings option.


It can be available to provide a nice shelter for bonuses, income tax refunds or any other type of one-time windfall such as the lottery winnings we all wish for.


It is a flexible way to save for special short term objectives such as a new car, a well deserved vacation, household needs or even an emergency fund. If any amount is withdrawn, that amount is still available as contribution room that can be put back into the plan in the future.


Now that we have TFSA available, depending on your situation, a common strategy is to build up a good nest egg in both a TFSA and an RRSP. This will provide all kinds of planning opportunities to minimize tax after retirement. The TFSA allows more flexibility and fewer restrictions as withdrawals from a TFSA do not trigger the claw-back of government benefits such as Old Age Security or the Guaranteed Income Supplement.


So join the TFSA birthday celebration and encourage your employees to review the possibilities of adding a TFSA to their retirement plan. Effective communication and decision support tools will allow your employees to understand and use the TFSA effectively to meet their specific needs.  Although the benefits may seem small in the short term, the long term benefits can be significant.


We all need to reward ourselves!


For further insight into TFSA’s we recommend the following: